Why Flipkart & Myntra Are Being Investigated By ED?

Two of the biggest Indian eCommerce portals: Flipkart and Myntra are currently being investigated by Enforcement Directorate (ED) for possible violation of FEMA or Foreign Exchange Maintenance Act. The charges are not yet clear, but it seems that the Government of India is focused this time to issue notices and levy penalties.

Whereas for Myntra, another senior ED official said, “The investigations are still on. We suspect there is a prima facie case of violation of FDI norms by Myntra. We will take a call on issuing a show-cause notice to the company once our probe is complete”

Interestingly, rumors are ripe that Flipkart and Myntra both can merge together to create India’s biggest eCommerce platform. This investigation pertaining to violation of foreign direct investments (FDI) can spell more trouble for both of these companies.

This is not the first time that Indian eCommerce portals have been subjected to such trials and investigations. In the year 2012, ED had initiated probe against major eCommerce players in India such as Flipkart, Snapdeal, Jabong, Yebhi, Myntra and Fashionandyou.

At that time also, the case was pertaining to violation of Foreign Direct Investment within Indian companies. There wasn’t much update after that, and everyone assumed that the case was closed. But with this sudden initiation of investigation and probe, it seems that case was never resolved.

Why Flipkart & Myntra Are Being Targeted?

As per norms of Exchange Maintenance Act, foreign companies can only invest in business to business ecommerce companies, example being marketplaces. But in online companies where products are directly sold to consumers, such foreign funding is not allowed. As per the rule, multi-brand and single brand retailers with foreign venture capital are not permitted to sell to Indian consumers directly.

And both Flipkart and Myntra has millions of dollars of foreign funding, albeit routed via offshore companies. In order to comply with the rule, both Flipkart and Myntra has converted into a marketplace, thereby making it legal to source foreign funding. Even Amazon has entered into Indian market using this methodology.

But again, it seems ED has found some loopholes in the operations of Flipkart and Myntra, thereby resuming the investigation and probe against them.

As per insider sources, investigation against Flipkart has been completed, and notices would be soon sent out to them. For Myntra, the probe has just started.

Myntra spokesperson refuted the charges by issuing a statement, “We are in compliance with all the government regulations pertaining to our business. We stand ready to fully and transparently cooperate with all government agencies.”

Flipkart also responded, “Flipkart is in complete compliance with the laws of the land. We will continue to support the authorities whenever we are approached,”

It seems that the success story of Indian eCommerce industry is far from over. We will keep you posted.

Mohul keenly observes the nuances of Indian startup world; and tries to demystify the secrets behind Technology, Marketing, Mobile and Internet. He is a Writer by passion, Marketer by choice and Entrepreneur by compulsion. Follow him on Twitter here: @_mohul